IT firms likely to post strong revenue growth in Q1; take hit on margins

Big IT services firms including TCS, Infosys, Wipro and HCL Technologies are likely to post revenue growth in the range of 2-10% in Q1

Indian IT services firms are likely to post a healthy rise in revenues in the range of 2-10% for the first quarter of the current financial year. However, margins are expected to dip for most companies as wage hikes and rising travel & utility costs would eat into profitability.

Though most companies including tier-I and mid-tier firms are likely to post sound earnings, the management commentary on large deals, revenue growth, and margin outlook would be the keys for gauging the sustainability of current growth momentum, say analysts.

Among the Tier-I IT companies, market leader Tata Consultancy Services (TCS) is likely to post 4.2% sequential growth in dollar revenues in Q1 of FY22, ICICI Securities said. For Infosys, the sequential (quarter-on-quarter) revenue growth is expected to be 4%. HCL Technologies is likely to post the lowest revenue growth of 2.2% among the big IT firms in the April-June quarter owing to some degree of operational disruption.

Among the top four, Wipro is expected to record the highest sequential revenue growth of 10.1% during this period. This is mainly because of the revenue flow from its recently-acquired entity Capco, which will add to its topline.

During the first quarter of FY22, Wipro completed the acquisition of financial services consultancy firm Capco for $1.45 billion. Revenue flow from this acquired entity will add to the top line of Wipro in the first quarter of FY22, the brokerage firm said.

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“IT companies have not seen any impact of the second Covid wave on the top line. This being a seasonally strong quarter, coupled with acceleration in digital technologies and improved deal pipeline, are further expected to drive IT companies’ revenues,” wrote Devang Bhatt, research analyst of ICICI Securities in a note.

However, some experts also pointed out that while revenue growth would remain robust, the traction seen in the large deal space was missing in the first quarter of this fiscal.

“There were many large deals that had been bagged by Indian service providers in FY21. But such deals were absent in the April-June period of this year. Therefore, management commentary on large deals and the total contract value (TCV) will indicate whether the high growth rates are sustainable in the coming years,” said Pareekh Jain, founder of Pareekh Consulting, who advises enterprises on technology outsourcing.

As the ongoing pandemic has accelerated the pace of digitalisation among enterprises, technology firms have emerged as the major beneficiaries of this trend. Owing to this demand uptick, many experts are pinning their hopes on 3-5 years of sustainable double-digit growth for Indian IT firms.

“The first-quarter earnings will be the acid test for future growth as the belief of a structural shift benefitting the Indian IT firms in the medium-term is going to be validated,” said Jain.

Meanwhile, most IT firms are likely to see a fall in their operating margin owing to recent wage hikes and rising utility costs.

“TCS and Wipro’s margins are expected to be impacted by wage hikes. TCS will have a second wage hike for all employees while Wipro will have a wage hike for 20% of employees & dilution in margins due to Capco acquisition,” said ICICI Securities.

For HCL Technologies, a sequential drop in margins of 50 basis points is likely due to the one-time bonus payout during the quarter.